You Don’t Need a lot of Money for a Great, Low Cost 401(k) Plan
You’ve probably seen the Discovery television show MythBusters. Two highly intelligent, slightly crazy guys and their team of hipster scientists test common myths, often by literally blowing stuff up. Today we will adopt that approach to a “401(k) plan consultation” episode, wherein the Frugal Fiduciary (that’s me) blows up the #1 myth plan participants have about low cost 401(k) plans and their limitations.
You Need A Lot of Money (or Participants) in Your 401(k) Plan in Order to Have a Low-Cost Plan
Did you hear that? That was the sound of a massive explosion. I had to detonate this myth because it’s completely false. We see it propagated all the time. An excerpt from a Marketwatch column on leaving your 401(k) behind: “Small 401(k) plans are generally less able to negotiate lower fees so there might be no cost advantages if you participate in a small plan.” A good, full-service 401(k) plan consultation will cover the plan design choices you will need to make in order to best suit your company’s needs. Examples:
- Providing for participant loans and hardship distributions
- Discussing options for employer profit sharing contributions
- Setting rules for eligibility and vesting provisions
- Potential in-service withdrawal provisions
Although some plan consultants may lead you to believe so, these options are absolutely NOT linked to how much money is in your plan or how many people you have participating. Sometimes there’s a false sense of frugality out there, and it usually comes from those using an asset-based fee model. They limit your investment choices and the complexity of your plan in the name of cost savings. Don’t fall for it. You can absolutely have a low cost 401(k) plan and customize the plan design to fit your needs. The amount of time they spend with you in plan consultation will be the same whether you have $100,000 in your plan, or $10,000,000. So you ought to pay accordingly.
When I’m not blogging, I help bust this myth for our clients. The people who come to us generally know what they want. They’re looking for low cost investments, such as Vanguard funds or ETFs.
Our clients don’t necessarily have large amounts of money or participants in their plans. What they do have is options, because I believe the best 401(k) plans—the ones that will help people actually achieve their retirement goals—are built on the freedom of the plan fiduciary to choose what makes the most sense for their business.
Do you agree with me? Drop me a note in the com box—I want to hear from you!